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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the Transition Period from _____________ to _____________

Commission file number 001-37569

Strongbridge Biopharma plc

(Exact name of Registrant as specified in its charter)

Ireland

 

98-1275166

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

900 Northbrook Drive

Suite 200

Trevose, PA 19053

(Address of principal executive offices)

Registrant’s Telephone Number, Including Area Code: +1 610-254-9200

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

Title of each class:

    

Trading Symbol(s)

    

Name of each exchange on which registered:

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the Transition Period from _____________ to _____________

Commission file number 001-37569

Strongbridge Biopharma plc

(Exact name of Registrant as specified in its charter)

Ireland

 

98-1275166

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

900 Northbrook Drive

Suite 200

Trevose, PA 19053

(Address of principal executive offices)

Registrant’s Telephone Number, Including Area Code: +1 610-254-9200

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

Title of each class:

    

Trading Symbol(s)

    

Name of each exchange on which registered:

Ordinary shares, par value $0.01 per share

SBBP

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and emerging growth company in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

 

 

 

 

Non-Accelerated Filer

Smaller Reporting Company

 

 

 

 

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of October 26, 2020, there were 67,243,772 ordinary shares of the registrant issued and outstanding.  

SBBP

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and emerging growth company in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

 

 

 

 

Non-Accelerated Filer

Smaller Reporting Company

 

 

 

 

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of October 26, 2020, there were 67,243,772 ordinary shares of the registrant issued and outstanding.  

Table of Contents

TABLE OF CONTENTS

 

 

Page

PART I.

Financial Information

1

 

 

Item 1.

Financial Statements

1

 

Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

1

 

Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019

2

 

Consolidated Statements of Stockholders’ Equity

3

 

Consolidated Statements of Cash Flow for the Nine Months Ended September 30, 2020 and 2019

4

 

Notes to the Unaudited Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

 

 

PART II.

Other Information

26

 

 

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3.

Defaults Upon Senior Securities

29

Item 4.

Mine Safety Disclosures

29

Item 5.

Other Information

29

Item 6.

Exhibits

30

SIGNATURES

31

Solely for convenience, the trademarks and trade names in this Quarterly Report on Form 10-Q (this “Quarterly Report”) are referred to without the ® and symbols, but absence of such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. The trademarks, trade names and service marks appearing in this Quarterly Report are the property of their respective owners.

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STRONGBRIDGE BIOPHARMA plc

Consolidated Balance Sheets

(In thousands, except share and per share data)

(unaudited)

September 30, 

    

December 31, 

    

2020

2019

ASSETS

Current assets:

Cash and cash equivalents

$

81,793

$

57,032

Marketable securities

21,072

Accounts receivable

2,895

2,289

Inventory

1,116

1,993

Prepaid expenses and other current assets

 

1,555

 

1,157

Total current assets

 

87,359

 

83,543

Property and equipment, net

 

237

 

291

Right of use asset, net

647

789

Intangible asset, net

 

21,344

 

25,110

Goodwill

 

7,256

 

7,256

Other assets

 

803

 

649

Total assets

$

117,646

$

117,638

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

1,588

$

3,331

Accrued and other current liabilities

 

17,772

 

20,962

Total current liabilities

 

19,360

 

24,293

Long-term debt, net

7,274

Warrant liability

3,965

4,127

Supply agreement liability, noncurrent

11,556

15,947

Other long-term liabilities

923

1,080

Total liabilities

 

43,078

 

45,447

Commitments and contingencies (Note 8)

Stockholders’ equity:

Deferred shares, $1.098 par value, 40,000 shares authorized, issued and outstanding at September 30, 2020 and December 31, 2019

44

44

Ordinary shares, $0.01 par value, 600,000,000 shares authorized; 66,893,964 and 54,205,852 shares issued and outstanding at September 30, 2020 and December 31, 2019

 

669

 

542

Additional paid-in capital

 

367,467

 

332,085

Accumulated deficit

 

(293,612)

 

(260,483)

Accumulated other comprehensive income

3

Total stockholders’ equity

 

74,568

 

72,191

Total liabilities and stockholders’ equity

$

117,646

$

117,638

The accompanying notes are an integral part of these unaudited consolidated financial statements.

1

Table of Contents

STRONGBRIDGE BIOPHARMA plc

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(unaudited)

Three Months Ended

Nine Months Ended

September 30

September 30, 

    

2020

    

2019

    

2020

    

2019

 

Revenues:

Net product sales

$

8,053

$

5,677

$

22,468

$

16,083

Royalty revenue

18

7

37

23

Total revenues

8,071

5,684

22,505

16,106

Cost and expenses:

Cost of sales (excluding amortization of intangible asset)

$

408

$

1,001

$

1,770

$

2,836

Selling, general and administrative

9,221

12,806

29,262

37,088

Research and development

 

6,771

 

7,552

 

20,475

 

22,874

Amortization of intangible asset

1,255

1,255

3,766

3,766

Total cost and expenses

 

17,655

 

22,614

 

55,273

 

66,564

Operating loss

 

(9,584)

 

(16,930)

 

(32,768)

 

(50,458)

Other income (expense), net:

Unrealized gain on fair value of warrants

6,949

3,202

162

10,079

Income from field services agreement

1,725

5,466

Expense from field services agreement

(1,672)

(5,659)

Interest expense

(523)

(776)

Other (expense) income, net

 

(1)

 

576

 

253

 

1,869

Total other income (expense), net

 

6,425

 

3,831

 

(361)

 

11,755

Loss before income taxes

 

(3,159)

 

(13,099)

 

(33,129)

 

(38,703)

Income tax expense

 

 

(691)

 

 

(1,768)

Net loss

$

(3,159)

$

(13,790)

(33,129)

(40,471)

Other comprehensive loss:

 

 

 

Unrealized loss on marketable securities

(3)

Comprehensive loss

$

(3,159)

$

(13,790)

$

(33,132)

$

(40,471)

Net loss attributable to ordinary shareholders:

Basic

$

(3,159)

$

(13,790)

$

(33,129)

$

(40,471)

Diluted

$

(10,108)

$

(16,992)

$

(33,129)

$

(50,550)

Net loss per share attributable to ordinary shareholders:

Basic

$

(0.06)

$

(0.25)

$

(0.60)

$

(0.75)

Diluted

$

(0.18)

$

(0.31)

$

(0.60)

$

(0.91)

Weighted-average shares used in computing net loss per share attributable to ordinary shareholders:

Basic

56,105,155

 

54,192,710

 

54,883,975

 

54,174,629

Diluted

57,404,652

54,540,646

 

54,883,975

 

55,844,719

The accompanying notes are an integral part of these unaudited consolidated financial statements.

2

Table of Contents

STRONGBRIDGE BIOPHARMA plc

Consolidated Statement of Stockholders’ Equity

(In thousands, except share amounts)

(unaudited)

 

    

    

Additional

    

    

Accumulated Other

    

Total

 

Ordinary Shares

Deferred Shares

Paid-In

Accumulated

Comprehensive

Shareholders’

 

Shares

    

Amount

    

Shares

    

Amount

    

Capital

Deficit

Income (Loss)

Equity

 

Balance—June 30, 2019

54,186,268

$

542

40,000

$

44

$

328,416

$

(237,713)

$

91,289

Net loss

(13,790)

(13,790)

Stock-based compensation

2,175

2,175

Ordinary shares issued, net of shares withheld for employee taxes

19,584

*

(33)

(33)

Balance—September 30, 2019

54,205,852

$

542

40,000

$

44

$

330,558

$

(251,503)

$

79,641

Balance—December 31, 2018

54,122,074

$

541

40,000

$

44

$

323,402

$

(211,032)

$

112,955

Net loss

(40,471)

(40,471)

Stock-based compensation

7,070

7,070

Exercise of stock options

43,841

1

178

179

Ordinary shares issued, net of shares withheld for employee taxes

39,937

*

(92)

(92)

Balance—September 30, 2019

54,205,852

$

542

40,000

$

44

$

330,558

$

(251,503)

$

79,641

Balance—June 30, 2020

54,355,957

$

544

40,000

$

44

$

337,734

$

(290,453)

$

47,869

Net loss

(3,159)

(3,159)

Stock-based compensation

2,070

2,070

Ordinary shares issued, net of shares withheld for employee taxes

26,896

2

(84)

(82)

Issuance of shares in connection with at-the-market facility, net of costs

1,400,000

14

4,738

4,752

Issuance of shares, net of offering costs

11,111,111

109

23,009

23,118

Balance—September 30, 2020

66,893,964

$

669

40,000

$

44

$

367,467

$

(293,612)

$

74,568

Balance—December 31, 2019

54,205,852

$

542

40,000

$

44

$

332,085

$

(260,483)

3

$

72,191

Net loss

(33,129)

(33,129)

Stock-based compensation

5,594

5,594

Issuance of warrants and beneficial conversion feature related to the Loan Agreement

2,457

2,457

Issuance of shares, net of offering costs

11,111,111

111

23,009

23,120

Ordinary shares issued, net of shares withheld for employee taxes

177,001

2

(416)

(414)

Issuance of shares in connection with at-the-market facility, net of costs

1,400,000

14

4,738

4,752

Unrealized loss on marketable securities

(3)

(3)

Balance—September 30, 2020

66,893,964

$

669

40,000

$

44

$

367,467

$

(293,612)

$

74,568

* Represents an amount less than $1.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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STRONGBRIDGE BIOPHARMA plc

Consolidated Statements of Cash Flow

(In thousands)

(unaudited)

Nine Months Ended

September 30, 

2020

2019

Cash flows from operating activities:

Net loss

$

(33,129)

$

(40,471)

Adjustments to reconcile net loss to net cash used in operating activities:

Change in fair value of warrant liability

(162)

(10,079)

Stock-based compensation

 

5,594

 

7,070

Amortization of intangible asset

3,766

3,766

Accretion of discounts on marketable securities

(53)

(251)

Amortization of debt discounts and debt issuance costs

 

406

 

Depreciation

 

64

 

56

Changes in operating assets and liabilities:

Accounts receivable

(606)

(1,736)

Inventory

493

1,212

Prepaid expenses and other current assets

 

(256)

 

2,157

Other assets

230

(970)

Accounts payable

 

(1,743)

 

777

Accrued and other liabilities

(7,738)

(4,709)

Net cash used in operating activities

 

(33,134)

 

(43,178)

Cash flows from investing activities:

Purchases of property and equipment

 

(10)

 

(42)

Purchases of marketable securities

(44,766)

Maturities of marketable securities

21,122

4,400

Net cash provided by (used in) investing activities

 

21,112

 

(40,408)

Cash flows from financing activities:

Proceeds from long-term debt, net

9,325

Proceeds from issuance of ordinary shares, net

23,120

Proceeds from issuance of ordinary shares in connection with at-the-market offering

4,752

Proceeds from exercise of stock options

179

Payments related to tax withholding for net-share settled equity awards

(414)

(92)

Net cash provided by financing activities

 

36,783

 

87

Net increase (decrease) in cash and cash equivalents

 

24,761

 

(83,499)

Cash and cash equivalents—beginning of period

 

57,032

 

122,490

Cash and cash equivalents—end of period

$

81,793

$

38,991

Supplemental disclosures of cash flow information:

Cash paid during the year for:

 

 

Interest

$

370

$

Income taxes other, net of refunds

$

695

$

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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STRONGBRIDGE BIOPHARMA plc

Notes to Unaudited Consolidated Financial Statements

1. Organization

We are a global, commercial-stage biopharmaceutical company focused on the development and commercialization of therapies for rare diseases with significant unmet needs.

Our first commercial product is Keveyis (dichlorphenamide), the first and only treatment approved by the U.S. Food and Drug Administration (the “FDA”) for hyperkalemic, hypokalemic, and related variants of primary periodic paralysis (“PPP”), a group of rare hereditary disorders that cause episodes of muscle weakness or paralysis.

We have two clinical-stage product candidates for rare endocrine diseases, Recorlev (levoketoconazole) and veldoreotide. Recorlev is a cortisol synthesis inhibitor currently being studied for the treatment of endogenous Cushing's syndrome. Veldoreotide is a next-generation somatostatin analog being investigated for potential applications in conditions amenable to somatostatin receptor activation, such as acromegaly. Both levoketoconazole and veldoreotide have received orphan designation from the FDA and the European Medicines Agency (“EMA”).

In January 2018, Strongbridge Ireland Limited, one of our wholly-owned subsidiaries, acquired the U.S. and Canadian rights to Macrilen (macimorelin), the first and only oral drug approved by the FDA for the diagnosis of patients with adult growth hormone deficiency. We launched Macrilen in the United States in July 2018. In December 2018, we sold Strongbridge Ireland Limited to Novo Nordisk Healthcare AG (“Novo”) for $145 million plus the right to receive tiered royalties on net sales of Macrilen through 2027. In addition, Strongbridge U.S. Inc., another of our wholly-owned subsidiaries, entered into an agreement with Novo Nordisk Inc. (“NNI”), a subsidiary of Novo, pursuant to which NNI funded the costs of 23 of our field-based employees to provide full-time ongoing services to NNI, including the promotion of Macrilen in the United States, for a period of three years. Novo also purchased 5.2 million of our ordinary shares at a purchase price of $7.00 per share. In December 2019, we reached an agreement with Novo to terminate the services agreement. We received a $6 million payment in connection with such termination and we no longer provide services to Novo.

Liquidity

We believe that our cash and cash equivalents of $81.8 million at September 30, 2020, will be sufficient to allow us to fund planned operations for at least 12 months beyond the issuance date of these unaudited consolidated financial statements.

We may never achieve profitability, and unless and until we do, we will continue to need to raise additional capital. We plan to continue to fund our operations and capital funding needs through equity or debt financing along with revenues from Keveyis. There can be no assurances, however, that additional funding will be available on terms acceptable to us.

2. Summary of significant accounting policies and basis of presentation

Basis of presentation

These unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). The unaudited consolidated financial statements reflect all adjustments, which include only normal recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the operating results and financial position for the periods presented.

The preparation of the unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures in the consolidated

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financial statements. Actual results could differ from those estimates. Results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

These unaudited consolidated financial statements should be read in conjunction with the accounting policies and notes to the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission on February 28, 2020 (the “2019 Annual Report”). Our significant accounting policies are described in Note 2 of the notes to the audited consolidated financial statements included in our 2019 Annual Report. Since the date of those financial statements, there have been no changes to our significant accounting policies.

Reclassifications

The consolidated financial statements contain certain reclassifications within our consolidated statements of cash flow for the nine months ended September 30, 2019 due to an immaterial incorrect classification of investments in marketable securities and the related impact on investing activities.

Leases

We account for leases in accordance with Accounting Standards Codification Topic 842, Leases (“ASC 842”). We determine if an arrangement is a lease at contract inception. A lease exists when a contract conveys to us the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and equipment), and (2) we have the right to control the use of the identified asset.

Operating leases where we are the lessee are included in Right of use (“ROU”) assets and Accrued and other current liabilities and Other long-term liabilities on our Consolidated Balance Sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.

Key estimates and judgments include how we determined (1) the discount rate we use to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.

ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Because our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

The lease term for all of our leases includes the noncancellable period of the lease. Lease payments included in the measurement of the lease asset or liability are comprised of our fixed payments.

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date less any lease incentives received.

For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We monitor for events or changes in circumstances that require a reassessment of a lease. If a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.

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We have elected not to recognize ROU assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. We recognize the lease payments associated with our short-term leases as an expense on a straight-line basis over the lease term. Variable lease payments associated with these leases are recognized and presented in the same manner as for all of our other leases.

Cash, cash equivalents and marketable securities

We consider all short-term highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of account balances at banks and money market accounts, respectively.

We occasionally invest our excess cash balances in marketable debt securities of highly rated financial institutions. We seek to diversify our investments and limit the amount of investment concentrations for individual institutions, maturities and investment types. We classify marketable debt securities as available-for-sale and, accordingly, record such securities at fair value. We classify these securities as current assets as these investments are available to us for use in funding current operations. There were no marketable securities as of September 30, 2020.

Unrealized gains and losses on marketable debt securities are recorded as a separate component of Accumulated other comprehensive income (loss) included in stockholders’ equity.

Segment information

Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions on how to allocate resources and assess performance. We view our operations and manage our business in one operating segment.

Net loss per share

Basic net loss per share is calculated by dividing the net loss attributable to shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss attributable to shareholders by the weighted-average number of ordinary shares outstanding for the period, including any dilutive effect from outstanding stock options or other equity-based instruments. Shares used in the diluted net loss per share calculations exclude anti-dilutive ordinary share equivalents, which currently consist of outstanding stock options, unvested restricted stock units (“RSUs”) equity-classified warrants and the conversion feature in our outstanding term loan agreement.

The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding as of September 30, 2020 and 2019, as they would be anti-dilutive:

September 30, 

2020

2019

Warrants

7,100,643

1,803,253

Stock options issued and outstanding

    

10,146,820

10,001,799

Unvested RSUs

1,355,660

990,700

Conversion feature of our outstanding term loan agreement

1,339,285

Recent accounting pronouncements – not yet adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an entity to measure and recognize expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities with unrealized losses, the standard requires allowances to be recorded through net income instead of directly reducing the amortized cost of the investment under the

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current other-than-temporary impairment model. The standard is effective for smaller reporting companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. We do not expect the adoption of this standard to have a material impact on our financial statements or internal controls.

3. Revenue recognition

Product sales, net

We sell Keveyis to one specialty pharmacy provider (the “Customer”), who is the exclusive distributor of Keveyis in the United States. The Customer subsequently resells Keveyis to patients, most of whom are covered by payors that may provide for government-mandated or privately negotiated rebates with respect to the purchase of Keveyis.

Revenues from sales of Keveyis are recognized when we satisfy a performance obligation by transferring control of the product to the Customer. Transfer of control occurs upon receipt of the product by the Customer. We expense incremental costs related to the set-up of contracts with the Customer when incurred, as these costs do not meet the criteria for capitalization.

Reserves for variable consideration

Revenues from sales of Keveyis are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and that result from rebates, co-pay assistance and other allowances that are offered between us and the patients’ payors. There is no variable consideration reserve for returns as we do not accept returns of Keveyis. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than the Customer). Where appropriate, these estimates may take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted buying and payment patterns of the Customer. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. We reassess our estimates on an ongoing basis. If actual results in the future vary from our estimates, we will adjust our estimates. Any such adjustments would affect net product revenue and earnings in the period such variances become known.

Trade Discount: We provide the Customer with a discount that is explicitly stated in our contract and is recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we receive sales order management, data and distribution services from the Customer. To the extent the services received are distinct from our sale of Keveyis to the Customer, these payments are classified in Selling, general and administrative expenses in our consolidated statement of operations and comprehensive loss.

Funded Co-pay Assistance Program: We contract with a third-party to manage the co-pay assistance program intended to provide financial assistance to qualified insured patients. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with Keveyis that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period. These payments are consideration payable to the Customer and the related reserve is recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheet.

Government Rebates: We are subject to discount obligations under state Medicaid programs and Medicare. We estimate our Medicaid and Medicare rebates for the estimated patient mix. These reserves are recorded in the same

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period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included in accrued expenses on the consolidated balance sheet. For Medicaid, accruals are based on estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. Manufacturers of pharmaceutical products are responsible for 70% of the patient’s cost of branded prescription drugs related to the Medicare Part D Coverage Gap. In order to estimate the cost to us of this Medicare coverage gap responsibility, we estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Our liability for these rebates consists of estimates of claims for the current quarter and estimated future claims that will be made for Keveyis transactions that have been recognized as revenue, but remains in the Customer’s inventory at the end of each reporting period.

Temporary Supply and Patient Assistance Programs: We provide free Keveyis to uninsured patients who satisfy pre-established criteria for either the Temporary Supply Program or the Patient Assistance Program. Patients who meet the Temporary Supply Program eligibility criteria may receive a temporary supply of free Keveyis for no more than 60 days while there is a determination of the patient’s third-party insurance, prescription drug benefit or other third-party coverage for Keveyis. The Patient Assistance Program provides free Keveyis for up to 12 months to uninsured patients who satisfy pre-established criteria for financial need. We do not recognize any revenue related to these free products and the associated costs are classified in selling, general and administrative expenses in our consolidated statements of operations and comprehensive loss.

4. Fair value measurements

We record financial assets and liabilities at fair value. Because of their short-term nature, the amounts reported in the balance sheet for cash, accounts receivable and accounts payable approximate fair value.

The guidance requires fair value measurements to maximize the use of “observable inputs.” The three-level hierarchy of inputs to measure fair value are as follows: 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Because of their short-term nature, the amounts reported in the balance sheet for cash and accounts payable approximate fair value.

Level 2: Significant observable inputs other than Level 1 prices such as quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The fair values of the outstanding warrants were measured using the Black-Scholes option-pricing model. Inputs used to determine estimated fair value of the warrant liabilities include the estimated term of the warrants, risk-free interest rates, and the expected volatility of the underlying stock. The significant unobservable inputs used in the fair value measurement of the warrant liabilities were the volatility rate and the estimated term of the warrants. Generally, increases and decreases in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement.

We did not have any transfers between the different levels.

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The following table presents our assets and liabilities that are measured at fair value on a recurring basis for the periods presented (in thousands):

As of September 30, 2020

 

Level I

Level II

Level III

Total

 

Cash equivalents

58,299

58,299

Marketable securities

Total assets

$

58,299

$

$

$

58,299

Warrant liability

3,965

3,965

Total liabilities

$

$

$

3,965

$

3,965

As of December 31, 2019

 

Level I

Level II

Level III

Total

 

Cash equivalents

56,544

56,544

Marketable securities

21,072